Friday, February 06, 2009

I've worked in retail and as a result, I have been exposed to the revenue and taxation sides of it. Basically, there are two common taes in retail. One is the Value Added Tax - VAT and the other one is income tax.

The VAT, also known as Sales tax in the US and ԱՎԵԼԱՑՎԱԾ ԱՐԺԵՔԻ ՀԱՐԿ in Armenia, is a percentage of the value of the good added to the price. So, something that retails at $1.00 will sell for $1.05 if the VAT is 5%. This is a consumption tax and the government gets its cut from the retail sales. This is not a good policy shaping tool because usually there are two tiers to this. The bare necessities are not taxed and everything else is taxed at the same rate. As such, it's a revenue generating tool for the government.

The other tax is the income tax. The $1.00 from the example above is the revenues of the retailer. There are quite a few expenses that get allocated to that $1.00 such as the cost of the good sold and overhead. The profit margin from that $1.00 can be maybe $0.10. The government then takes its cut from that $0.10 of maybe 30% so the retailer ends up with $0.07 out of the dollar. The government ends up with $0.08 in this example.

The basic tool for the government to control this are the receipts. In the US it is illegal to not give out receipts and it is part of the social contract for the companies to give receipts to their customers. The businesses will always demand receipts because then they will show that as part of expenses. The consumers do not have an incentive to demand receipts. So the government uses a stick to prevent businesses from under-reporting their revenues, and the consumers can return items if they have the receipt. So with this two prong strategy, receipts are ubiquitous in this country. The businesses then find creative ways to avoid income tax. The VAT flow to the government is fairly representative to the retail sales.

Now the optimistic news part. In Armenia there is no social contract of providing receipts. Tax evasion has been, and remains, a popular way of accumulating wealth for the business elite in the country. One way has been to under-report revenues. You basically have two sets of books: one is the real one used for decision making, and the other one is for the government where your revenues are the same, or less than, your expenses so you don't pay income tax. On top of that, you collect the VAT from your customers but you pocket it since the government doesn't know what you have sold. It's a quite lucrative way of creating wealth for yourself.

After years of efforts, the Armenian government has come up with a way to get a clear picture of the retail sales. At first they tried to threaten the businesses to record their sales. Then they demanded the businesses give receipts. Then they asked the consumers to demand receipts. But since none of the parties involved had any stake in the receipts being recorded, all these efforts were futile.

The new approach is to incentivise the consumers by giving them money. Getting a percentage of the sales would not make much sense (who cares about a few cents per purchase?) so the government pools this percentage into a lottery with a few prizes depending on the amount on the receipt as big as $16,000. Obviously, there is a lot of interest among the consumers. By basing the prize on the amount of the purchase, they make sure that the consumers demand that the sales be recorded correctly. Through a televised lottery they make sure that the retailers do not keep two sets of receipts, i.e. give out a fake receipt.

The upside for the retailers is that they get a way to promote their brand for free. Another upside for the retailers will probably be that the amount of the average sale will increase since the prize depends on the amount.

6 comments:

Anonymous
said...

Armenia doesn't need VAT at this stage, that tax will hit everyone indiscriminately and wpn't help in redistributing wealth in the country in an efficient manner

there should be income tax practice based on the american taxation law, everyone should report his income annually, from 0 age to 100 and aboveindividuals and commercial entities should report their income and pay taxes, of course there would be credits, tax exemptions, dedcutions, etc but this would be a fair system

Income tax and lower customs duty on necessities, and manufacturing, agricultural goods and machines that's the way

ha ha the banditocracies are not getting their "usual" income from the taxes they impose on the local buisnesses, so they need to impliment a way to GET THAT MONEY from all those who dont pay up. i wonder if RK's song (the lil bitch levon) will be paying taxes on all the VW's and BENZ's he sells

The RKs sons will not pay taxes, otherwise how else he can afford the excessive lifestyle and making brawls in Dubai. The same applies to the sons and daughters of the rest of the bandits holding government posts.The main cause of the horrid situation is the accumulation of capital. If you stop them doing so or demonstrate that it leads to nowhere by destroying their capital the problem will be partially resolved. They would take their money and go and live somewhere else were it will be safer for their capital. Risk is a big factor in capitalism.